Tuesday 2nd, August, 2011Meeting 25
Econ N171 Economic DevelopmentAtanu Dey
Paper “Subsistence, Trade and Exchange: Understanding Developing Economies.”
Bauer criticized mainstream development economics◦ Neglect of internal trade
◦ The notion of the vicious cycle of poverty
◦ Nonmonetized investment leading to capital formation
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TOWARDS A NEW PARADIGM FOR DEVELOPMENT
– Dr. Joseph E. Stiglitz, October 1998
Later
Sustainable development: a market-liberal vision
- James A. Dorn
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Broader objectives of development than embodied in the consensus
It confuses means with ends: privatization and trade liberalization are means to the goal of sustainable and democratic growth
Too little attention paid to institutional infrastructure required for markets to function and for competition to work
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The phrase coined by John Williamson in 1990 refers to “the lowest common denominator of policy advice being addressed by the Washington-based institutions to Latin American countries as of 1989.”
What is it?◦ http://www.cid.harvard.edu/cidtrade/issues/washington.html
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A redirection of public expenditure priorities toward fields offering both high economic returns and the potential to improve income distribution, such as primary health care, primary education, and infrastructure
Tax reform (to lower marginal rates and broaden the tax base)
Interest rate liberalization A competitive exchange rate Trade liberalization Liberalization of inflows of foreign direct investment Privatization Deregulation (to abolish barriers to entry and exit) Secure property rights
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Corporate governance Anti-corruption Flexible labor markets WTO agreements Financial codes and standards “Prudent” capital-account opening Non-intermediate exchange rate regimes Independent central banks/inflation targeting Social safety nets Targeted poverty reduction
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“… not only the Washington consensus but also earlier development paradigms failed: they viewed development too narrowly”
“Development represents a transformation of society, a movement from traditional relations, traditional ways of thinking, traditional ways of dealing with health and education, traditional methods of production, to more „modern‟ ways.”
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From the traditional to the modern
Needed change provides more freedom, control over their destinies
Therefore development strategy must facilitate that transformation
Development was seen as economic growth –increase in capital stock and better resource allocation.
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Left-wing and Right-wing
Left economists saw a role for the government to fix market failures
Right economists recognized government as the problem and markets the solution
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They cannot fix market failures
They lack the resources needed for resource allocation
They play too large a role
Their objectives were rent-seeking instead of development
Public Choice Theory – James Buchanan (b. 1919.) Nobel Prize Economics 1986.
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Appeal to history
Govt had an active role in those economies that developed
Where govt was missing, development did not take place
Capitalist economies before govt intervention were unstable and iniquitous
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While markets are at the centre of the economy, govt must play an important role. It‟s a matter of balance – it depends on the country, the govt, the maturity of its markets – it is context sensitive.
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Collapse of the USSR and the end of the Cold War
The failure of the Washington Concensus – failure of “liberalization, stabilization, and privatization” or the neoliberal prescription
Some countries that followed the WC did not develop Others which did not follow the WC did develop
What went wrong is that the subtleties of markets were not understood, that private property and “getting prices right” are not sufficient to make markets work. It also needs institutional infrastructure. Competition was missing.
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It did not follow the neoliberal policies and yet it did develop
Govt played a role – state ownership of some industries and policy of promoting some industries
Govt intervention in trade (export promotion)
Govt regulation of financial markets
Govt emphasis on education, technology and closing the knowledge gap
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Late 90s
Ingredients of the crisis
Crony capitalism
Financial mismanagement and inadequate financial institution supervision
Short-term capital flows◦ Average daily turnover in global foreign exchange
markets is estimated at $3.98 trillion
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Core objective: the transformation of society
GDP growth per capita is important but only in part
It has to increase standard of living in terms of health and literacy
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They are less detailed than plans (that were used for central planning)
Set the vision for the society – which may include quantitative targets but only as elements, not the goal
Include a transformation of institutions, the creation of new social capital and new capacities
Cannot be a blueprint or a map of where society is going – that requires too much information and there are uncertainties
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All societies are resource-constrained
Poor countries have limitations such as govt capacity
So priorities have to be set
Sequencing: creating a competition and regulatory framework before privatization
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Economic theory says that prices perform all the coordination required – but this needs a full set of markets.
Poor countries have missing markets
So coordination between private and public sector is needed, and within and among govt agencies
This coordination must be a function of the development strategy
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To achieve political and social stability
For “ownership” of policies
Inclusive development
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Could explain lack of development impact
Range of projects – with different social returns
Good projects are funded by aid agencies and that releases resources for bad projects
The additional benefits of the funded projects is hard to access
The marginal benefits are often lower than anticipated
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How wide is the coverage from a project
Example of “One Laptop Per Child” ◦ Since all students cannot be given one, it will
increase inequality
◦ Instead, increasing opportunities for all students will be a better utilization of resources
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Effective Change Arises from Within
This happens through ownership and participation in the process of development
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Private sector development◦ As opposed to a focus on the government
◦ Help create a competitive, efficient private sector
◦ A healthy and educated labor force
Public sector development◦ These are typically mis-managed
Community Development, Family Development, and Individual Development
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